Privatization in the United States

Business Economics, Oct, 1995 by Robert H. Wessel

Privatizations in the United States have been taking place at an increasing rate in recent years. As a result, business opportunities are being created in substantial numbers every day. Privitazations are caused by dissatisfaction with the high cost or poor level of service provided by public enterprises. The industries involved have usually been in the public domain, because originally they were viewed as performing inherently public functions (the post office is an example), or because provision of the services was initiated by public bodies. Most municipal services fall into these categories. The gains hoped for from privatizations have been relief for overstrained public budgets and the prospect of reliable and efficient public services.

Except for Conrail, almost all of America's privatizations have involved local rather than regional or national governments and have not been ideologically based. To be successful, privatizers have had to meet the needs of this local market. A brief review should reveal where private suppliers have been more efficient and therefore have operated at lower costs as well as the conditions under which they are likely to continue to be so.

A locality has a choice of many different mixes of public and private providers for most services it makes available. The ultimate choice of any one is likely to be the results of cost analyses and a combination of other factors, both rational and irrational.(1) Usually these selections have produced favorable results. Three-quarters of the city and county executives responding to a Census of Governments Survey in 1987 reported experiencing savings of from 10 percent to more than 20 percent with private operation.(2)

The most consistent road to lower costs by privatizing industries has always been the introduction of competition into otherwise monopolized or semimonopolized markets. In the first place, this step brings more aggressive purchasing in the factor markets. Regressions analysis by Yolanda Kodrzycki indicate that localities regularly contract out to avoid paying high public sector wages.(3) As a result, private firms often have lower costs because they pay lower wages and benefits than those demanded by public employee unions. They often also find dismissal of unsatisfactory workers easier and can use part-time employees freely. Vickers and Yarrow emphasize superior incentives and better methods of monitoring management as well as the promotion of advanced techniques.(4) Private contractors, however, are not always more efficient, especially in the public utility field when competition is absent. An added negative factor is introduced when the expenses of monitoring private operations are also considered.

Privatizations usually take two forms. Firms that were formerly government owned and operated are sold to private parties, who then offer their products or services on the market. The alternative is for private contractors to bid for the right to supply products or service formerly supplied by government. This can be either on a bid or contract basis. Several examples of privatization in the American market should prove instructive.

WASTE MANAGEMENT

Some local communities, especially those hard pressed financially, long ago turned to private contractors to obtain efficient waste disposal at low costs. This service has become well established as large companies such as Waste Management (WMX), Browning-Ferris, Western Waste and Chambers Development now compete vigorously in collecting trash and its disposition. At present, over a third of landfill operation is handled privately, according to the Census Survey. Waste Management, the largest company, now serves 12 million households and has 750,000 commercial accounts.(5) Its waste collection subsidiary has over 30,000 employees and, as of the end of 1993, it had over $3.6 billion invested in landfills.(6)

This industry is expected to grow rapidly, with its market potential estimated at $30 billion in a few years. This growth is anticipated in spite of periodic regulatory battles over landfill operations and accidents. The private market, although large, is by no means developed to its capacity. Consequently, ample opportunities for new, efficient contractors exist. The industry is highly competitive, as evidenced by the bidding process by which much of its business is negotiated. Recently the Bergen County, New Jersey, contract covering over 330,000 tons of waste a year attracted competitive bids of $48.32 per ton from WMX, $55 from Browning-Ferris, and $42.75 from Chambers Development, the ultimate winner.(7)

WATER MANAGEMENT

In the United States, the provision of about 20 percent of the drinking water and the disposal of 2 percent of the waste water are handled by government owned but privately managed water or sewer facilities. Today, however, most of the nation's water operations are still dominated by local governmental bureaucracies, so that many possibilities for new private entrants exist. The extent of privatization is growing and is already greater than that reported by the Census in 1987. Private contractors in this field are at present receiving annual fees of close to $500 million for their managerial services, a figure that some estimate could grow to $30 billion if their market position eventually approaches 100 percent. Privatization has led to vigorous competition and typically resulted in savings of at least 22 percent in water treatment costs.(8) In some instances, private contractors have been able to operate local water facilities for 40 percent less than local governments.